Employer to Pay for Failing to Monitor Recordkeeping Costs

(PLANSPONSOR.com) – A court found ABB Inc. and Fidelity breached some fiduciary duties owed to participants in ABB’s retirement plans.

Specifically, U.S. District Judge Nanette K. Laughrey of the U.S. District Court for the Western District of Missouri found the ABB defendants violated their fiduciary duties to the plans when they failed to monitor recordkeeping costs, failed to negotiate rebates for the plan from either Fidelity or other investment companies chosen to be on the plans’ platform, selected more expensive share classes for the investment platform when less expensive share classes were available, and removed the Vanguard Wellington Fund from the investment menu and replaced it with Fidelity’s Freedom Funds.

http://www.plansponsor.com/Employer_to_Pay_for_Failing_to_Monitor_RK_Costs.aspx

Korte Commentary:

Participant lawsuits surrounding excessive fees in defined contribution plans are becoming so common that this story is hardly “news”, but we think it serves as excellent example of the potential pitfalls associated with bundled recordkeeping and investment management relationships.

In many bundled arrangements, explicit recordkeeping and administrative fees are often waived if a certain percentage of a plan’s assets are invested in the provider’s proprietary funds or other funds offered on its fund platform. These “free” recordkeeping structures limit the spectrum of investment options from which a plan sponsor can choose for its participants and the lack of transparency surrounding revenue sharing and fee rebates creates litigation exposure and increases regulatory scrutiny.

At Korte Consulting, we are firm believers that investment option selection should serve as the primary basis for choosing the optimal vendor/service arrangements, not the other way around. When thinking about investment design, plan sponsors should be asking themselves the following questions:

1. What investments (and investment structure) is the most appropriate for our workforce?
2. What service/vendor arrangement is most appropriate to support the investment structure?
3. Which vendors are best equipped to deliver the necessary services?

Bundled structures can be effective in the right situations, but only if the plan sponsor can show that investment performance and fees are commensurate with other options available to the plan on an unbundled basis.

DC Plan Investment Structure Pitfalls

• Avoid allowing administration/recordkeeping to drive investment decisions.
• Aside from company stock, closed menu investment structures in a bundled arrangement create greatest exposure to fiduciary litigation (from employees, beneficiaries, or the Department of Labor).
• Bundled structures with closed menus tend to have lower administrative costs, but higher investment fees.
• Investment management fees are largest component of total plan costs, representing an average of 74% of all-in fees and expenses.
• Bundled arrangements inhibit fee transparency if not structured carefully and often make it more difficult to meet the new 408(b)(2) fee disclosure and reporting requirements that will go into effect on July 1, 2012.